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Chapter 3

Chapter 3. Demand and Supply. Economic Principles. Individual and market demand Market-day, short-run and long-run supply Determination of equilibrium price and quantity. Price Formation. Market price is a reflection of people’s willingness to buy and sell. Measuring Market Demand.

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Chapter 3

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  1. Chapter 3 Demand and Supply Gottheil — Principles of Economics, 6e

  2. Economic Principles • Individual and market demand • Market-day, short-run and long-run supply • Determination of equilibrium price and quantity Gottheil — Principles of Economics, 6e

  3. Price Formation Market price is a reflection of people’s willingness to buy and sell. Gottheil — Principles of Economics, 6e

  4. Measuring Market Demand A change in quantity demanded shows: • People’s willingness to buy specific quantities of a good or service at specific prices. Gottheil — Principles of Economics, 6e

  5. Measuring Market Demand Law of demand • The inverse relationship between price and quantity demanded. Gottheil — Principles of Economics, 6e

  6. Measuring Market Demand Demand schedule • A schedule which shows the specific quantity of a good or service that people are willing and able to buy at different prices. Gottheil — Principles of Economics, 6e

  7. Measuring Market Demand Aggregate the demand of many individuals into market demand by: • Adding up the quantities purchased by all consumers at given market prices. Gottheil — Principles of Economics, 6e

  8. Measuring Market Demand If each of the seven dwarfs buys three cups of coffee per week at Snow White’s Café at a price of $1/cup, what is market quantity demanded at a price of $1? • 3 + 3 + 3 + 3 + 3 + 3 + 3 = 21. Gottheil — Principles of Economics, 6e

  9. Measuring Supply Supply schedule • It is a schedule showing the specific quantity of a good or service that suppliers are willing and able to provide at different prices. Gottheil — Principles of Economics, 6e

  10. Measuring Supply Market-day supply • A market situation in which the quantity of a good supplied is fixed, regardless of price. Gottheil — Principles of Economics, 6e

  11. Measuring Supply A supply curve graphs the relationship between price and quantity supplied. Gottheil — Principles of Economics, 6e

  12. Measuring Supply The supply curve is upward-sloping. • Higher prices provide sellers with an incentive to increase quantity supplied. Gottheil — Principles of Economics, 6e

  13. Measuring Supply If there are three builders in a small town, and if each supplies 4 houses per year at a price of $150,000, what is market quantity supplied at this price? • 4 + 4 + 4 = 12. Gottheil — Principles of Economics, 6e

  14. EXHIBIT 1A INDIVIDUAL DEMAND CURVES FOR FISH Gottheil — Principles of Economics, 6e

  15. EXHIBIT 1B INDIVIDUAL DEMAND CURVES FOR FISH Gottheil — Principles of Economics, 6e

  16. EXHIBIT 2 THE MARKET DEMAND CURVE Gottheil — Principles of Economics, 6e

  17. Exhibit 2: The Market Demand Curve The curve in Exhibit 2 represents: • The market demand for fish. • It is the sum of all individual demands for fish. Gottheil — Principles of Economics, 6e

  18. EXHIBIT 3 MARKET-DAY SUPPLY CURVE Gottheil — Principles of Economics, 6e

  19. Exhibit 3: Market-Day Supply Curve The market-day supply curve for fish is a vertical line because: • Fishermen cannot change the quantity they supply once the day’s catch comes in. Gottheil — Principles of Economics, 6e

  20. EXHIBIT 4 EXCESS DEMANDAND EXCESS SUPPLY

  21. Exhibit 4: Excess Demand and Excess Supply The quantity of fish purchased, when price rises from $5 to $8: • Remains at 6,000. • The market-day supply curve is a vertical line. Gottheil — Principles of Economics, 6e

  22. Exhibit 4: Excess Demand and Excess Supply The relationship between quantity demanded and quantity supplied at a price of $8 is: • Quantity demanded is 4,500. • Quantity supplied is 6,000. • Excess supply of 1,500. Gottheil — Principles of Economics, 6e

  23. Exhibit 4: Excess Demand and Excess Supply The relationship between quantity demanded and quantity supplied at a price of $4 is: • Quantity demanded is 6,500. • Quantity supplied is 6,000. • Excess demand of 500. Gottheil — Principles of Economics, 6e

  24. Exhibit 4: Excess Demand and Excess Supply The relationship between quantity demanded and quantity supplied at a price of $5 is: • They are equal. Gottheil — Principles of Economics, 6e

  25. Determining Equilibrium Price What is unique about the Equilibrium Price? • Quantity demanded is equal to quantity supplied. • There is neither an excess supply nor an excess demand. • Price gravitates toward the equilibrium price, in well-functioning competitive markets. Gottheil — Principles of Economics, 6e

  26. EXHIBIT 5 MARKET-DAY,SHORT-RUN,AND LONG-RUNSUPPLY 26

  27. Exhibit 5: Market-Day, Short-Run, and Long-Run Supply The short-run supply curve slopes upward, while the market-day supply curve is a vertical line because: • If price rises, then in the short-run suppliers are able to increase the use of some but not all of the resources they use to produce goods and services. Gottheil — Principles of Economics, 6e

  28. Exhibit 5: Market-Day, Short-Run, and Long-Run Supply The short-run supply curve slopes upward, while the market-day supply curve is a vertical line because: • The short-run suppliers are able to: • Make modest increases in quantity supplied if price rises. • Make modest decreases in quantity supplied if price falls. Gottheil — Principles of Economics, 6e

  29. Exhibit 5: Market-Day, Short-Run, and Long-Run Supply The short-run supply curve slopes upward, while the market-day supply curve is a vertical line because: • This results in a short-run supply curve which is steeply upward-sloping. • The quantity supplied is fixed on the market-day supply curve. Gottheil — Principles of Economics, 6e

  30. Exhibit 5: Market-Day, Short-Run, and Long-Run Supply The long-run supply curve is less steep than the short-run supply curve because: • Suppliers are able to change the quantity of all resources they use to produce goods and services during this time interval. • A given increase in price will result in a larger increase in quantity supplied in the long run than in the short run. Gottheil — Principles of Economics, 6e

  31. Change in Demand A change in price will not result in a change in demand. • A change in price results in a change in quantity demanded. • A change in demand is caused by factors other than a change in the price of that good. Gottheil — Principles of Economics, 6e

  32. Change in Demand A change in a consumer’s income will result in a change in demand. • A change in a consumer’s income will cause the demand curve to shift. Gottheil — Principles of Economics, 6e

  33. EXHIBIT 6 CHANGE IN DEMAND Gottheil — Principles of Economics, 6e

  34. Exhibit 6: Change in Demand In Exhibit 6, when the demand curve shifts from D to D′, the equilibrium price and quantity demanded: • The equilibrium price rises from $5 to $6. • The quantity demanded rises from 6,000 to 6,500. Gottheil — Principles of Economics, 6e

  35. Exhibit 6: Change in Demand If fish are a normal good and consumer incomes have increased, the demand will shift from D to D′. • If a good is normal, then an increase in consumer income will increase demand. Gottheil — Principles of Economics, 6e

  36. Exhibit 6: Change in Demand In Exhibit 6, when the demand curve shifts from D to D″, the equilibrium price and quantity demanded: • The equilibrium price falls from $5 to $4. • The quantity demanded falls from 6,000 to 5,500. Gottheil — Principles of Economics, 6e

  37. Exhibit 6: Change in Demand If fish and beef are substitutes, then a decrease in the price of beef will cause demand to shift from D to D″. If the price of beef declines: • The quantity of beef demanded will increase. • The demand curve for fish will shift left. Gottheil — Principles of Economics, 6e

  38. Changes in Demand What happens to the demand for software when computer hardware and software are complements, and the price of hardware declines: • A decline in hardware prices will increase the quantity of hardware demanded. • If more hardware is purchased, the result will be more software purchased, since they are complements. Gottheil — Principles of Economics, 6e

  39. Changes in Demand What happens to the demand for software when computer hardware and software are complements, and the price of hardware declines: • The increase in the quantity of software demanded was caused by a factor other than the price of software. • The demand for software will increase. Gottheil — Principles of Economics, 6e

  40. Changes in Demand If consumers anticipate that computer hardware will become considerably cheaper in the coming months, today’s demand for hardware: • Today’s demand will decrease (shift to the left). • Some consumers will delay their purchase in anticipation of lower future prices. Gottheil — Principles of Economics, 6e

  41. Changes in Demand The demand for day-old bakery goods if consumer incomes rise, and day-old bakery goods are inferior goods will: • The demand for day-old bakery goods will fall as consumer incomes rise. • Inferior goods are goods that people consume less of as their incomes rise. Gottheil — Principles of Economics, 6e

  42. Changes in Demand When students are gone during the summer, the demand for pizza slices on campus: • The demand will fall because there will be fewer consumers. Gottheil — Principles of Economics, 6e

  43. Changes in Demand If the Surgeon General announces that cheeseburgers reduce heart attack risk and prevent premature baldness, this will affect market demand for cheeseburgers: • The demand will rise. • The news will increase consumer tastes and preferences for cheeseburgers. Gottheil — Principles of Economics, 6e

  44. Changes in Demand Which of the following are most likely to be consumer substitutes: i. Peanut butter and jelly ii. Coke and Pepsi iii. Cars and gasoline iv. Telephones and telephone books Gottheil — Principles of Economics, 6e

  45. Changes in Demand Which of the following are most likely to be consumer substitutes: i. Peanut butter and jelly ii. Coke and Pepsi iii. Cars and gasoline iv. Telephones and telephone books Gottheil — Principles of Economics, 6e

  46. EXHIBIT 7 DISTINGUISHING CHANGES IN DEMAND FROM CHANGES IN QUANTITY DEMANDED Gottheil — Principles of Economics, 6e

  47. Exhibit 7: Distinguishing Changes in Demand from Changes in Quantity Demanded Movement along the demand curve D from a price of $10 to a price of $7 illustrates a change in • Quantity demanded. Gottheil — Principles of Economics, 6e

  48. Exhibit 7: Distinguishing Changes in Demand from Changes in Quantity Demanded In which of the following do we know for certain that a change in demand occurred: i. Price declined and quantity demanded increased. ii. Price remained the same and quantity demanded increased. Gottheil — Principles of Economics, 6e

  49. Exhibit 7: Distinguishing Changes in Demand from Changes in Quantity Demanded In which of the following do we know for certain that a change in demand occurred: i. Price declined and quantity demanded increased. ii. Price remained the same and quantity demanded increased. Gottheil — Principles of Economics, 6e

  50. EXHIBIT 8 CHANGE IN SUPPLY Gottheil — Principles of Economics, 6e

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